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Housing Data More Than A Little Deceptive
Several recent data points in the housing sector have stirred up investors' hopes that the sector is bumping up along the bottom. This may be premature; these so-called "bullish" reports will lead to more supply, when what will really create balance in the market is less.
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Builders: Confidence Is Up
The first encouraging bit of news was the release of the National Association of Home Builders/Wells Fargo index of builder confidence. The index reached 17 in July, up only a smidgen from the 15 level in June. Anything under 50 is considered negative for sales, but I guess housing investors are so depressed that any move up is something to hang their hats on.
The second report was from the U.S. Commerce Department and it said that new housing starts rose in June 2009 by 3.6%, more than the street expected, and is now at an annual rate of 582,000. This was the largest jump since 2004.
Even more encouraging for bulls was that building permits, which are a sign of future trends in construction, climbed 8.7% to an annual rate of 563,000.
Who's Buying?
The problem with this "encouraging" news is that the last thing the market needs now is more supply of houses on the market, as there is still too much inventory. Who will buy these homes? Mortgage rates have ticked up recently, and credit is still not flowing freely in the marketplace. Also, the number of foreclosures still has not peaked, and neither has unemployment, which typically lags a recovery.
Some of the homebuilders discussed these trends in recent conference calls. Don Tomnitz, the CEO of D.R. Horton (NYSE:DHI) said recently that "our industry continues to face many challenges, high levels of both new and existing inventory, increasing foreclosures, tight credit for our home buyers, low consumer confidence, increasing unemployment and continued pricing pressure."
The management of Pulte Homes (NYSE:PHM) made similar comments during its earnings call, and said that rising foreclosures and falling home prices caused the "very challenging operating environment during the quarter."
Homebuilders Banking on Stabilization of Fundamentals
Also, the homebuilding group already reflects a stabilization of fundamentals in the industry. The S&P Homebuilders SPDR (NYSE:XHB) has rallied hard off its lows reached in March 2009, and is up 57% as of the close on July 16, 2009. The iShares Dow Jones US Home Construction ETF (NYSE:ITB) has made a similar move off its bottom, and is up 67% from its low.
There is insider selling going on as well. Bob Toll, the CEO of Toll Brothers (NYSE:TOL) has been selling stock all year, with the latest sale consisting of nearly one million shares. (Learn more about insider selling in Keeping An Eye On The Activities Of Insiders And Institutions.)
Short-Term Trend Vs. Long-Term Fundamentals
Investors cheered the latest data points in the housing sector, but they make be looking at the data the wrong way and reacting to a short-term trend, rather than looking at a long-term perspective of the fundamentals. Bottom line: The industry needs less supply, not more.
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Builders: Confidence Is Up
The first encouraging bit of news was the release of the National Association of Home Builders/Wells Fargo index of builder confidence. The index reached 17 in July, up only a smidgen from the 15 level in June. Anything under 50 is considered negative for sales, but I guess housing investors are so depressed that any move up is something to hang their hats on.
The second report was from the U.S. Commerce Department and it said that new housing starts rose in June 2009 by 3.6%, more than the street expected, and is now at an annual rate of 582,000. This was the largest jump since 2004.
Even more encouraging for bulls was that building permits, which are a sign of future trends in construction, climbed 8.7% to an annual rate of 563,000.
Who's Buying?
The problem with this "encouraging" news is that the last thing the market needs now is more supply of houses on the market, as there is still too much inventory. Who will buy these homes? Mortgage rates have ticked up recently, and credit is still not flowing freely in the marketplace. Also, the number of foreclosures still has not peaked, and neither has unemployment, which typically lags a recovery.
The management of Pulte Homes (NYSE:PHM) made similar comments during its earnings call, and said that rising foreclosures and falling home prices caused the "very challenging operating environment during the quarter."
Homebuilders Banking on Stabilization of Fundamentals
Also, the homebuilding group already reflects a stabilization of fundamentals in the industry. The S&P Homebuilders SPDR (NYSE:XHB) has rallied hard off its lows reached in March 2009, and is up 57% as of the close on July 16, 2009. The iShares Dow Jones US Home Construction ETF (NYSE:ITB) has made a similar move off its bottom, and is up 67% from its low.
There is insider selling going on as well. Bob Toll, the CEO of Toll Brothers (NYSE:TOL) has been selling stock all year, with the latest sale consisting of nearly one million shares. (Learn more about insider selling in Keeping An Eye On The Activities Of Insiders And Institutions.)
Short-Term Trend Vs. Long-Term Fundamentals
Investors cheered the latest data points in the housing sector, but they make be looking at the data the wrong way and reacting to a short-term trend, rather than looking at a long-term perspective of the fundamentals. Bottom line: The industry needs less supply, not more.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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